NEW YORK, Sept. 20 (Reuters) – Investors baffled by the fallout from heavily indebted Chinese real estate company Evergrande (3333.HK) were assessing the potential for a bigger upheaval after a massive sell-off that hit stocks around the world. Read more

For now, many US-based investors believe the woes of Evergande, China’s second-largest real estate developer, are unlikely to turn into a systemic crisis reminiscent of the collapse of Lehman Brothers in 2008. Read more

Yet, with U.S. equity valuations stretched on a historic basis and the imminent unwinding of the Federal Reserve’s easy monetary policies, some fear that a sudden drop in risk appetite will leave global markets vulnerable to a sell-off. .

“We have a very cautious view of the market given the high valuation levels,” said Rob Romero, portfolio manager at Connective Capital, a technology hedge fund with $ 100 million in assets under management. “It is difficult to know how far the contagion will spread. We are looking for signs of resilience in the US market. If that does not happen, it means that the contagion is more likely to snowball.”

Concerns about the extent of Evergrande’s impact on the global financial system come at a time when high stock market valuations were prompting many investors and analysts to call for a pullback.

The benchmark S&P 500 was trading at 21.6 times expected earnings on Friday, near its highest levels since the dot-com bubble of the late 1990s, and before Monday’s session it had risen more than 18% for the year to date.

BREWING CONCERN

As Evergrande’s woes have been unfolding for several months, its shares fell more than 10% on Monday as Chinese regulators warned its $ 305 billion in liabilities could lead to widespread losses in China’s financial system if its debts are not stabilized. Read more

The company’s late payments could trigger cross defaults. Read more

Concerns about a larger default are spreading around the world, with the MSCI Global down 1.62%, on pace with its worst performance in two months. Investors rushed into safe-haven stocks such as Treasuries, taking the yield of the US benchmark to a 10-year to one-week low, while US 10-year interest rate swaps on treasury bills hit their highest level in nearly six months.

Another sign of concern in money markets, analysts cited the three-month Libor, which reached 12.5 basis points, a four-week high, reflecting concerns about potential strains in the global banking system. L1N2QM1UV

At the same time, there appear to be few signs that institutional investors have taken an over-leveraged position in Evergrande that would trigger a liquidity crunch, said Robert Sears, chief investment officer at Capital Generation Partners.

“So far, most negative actions [has] been in the Chinese real estate industry, ”he said. “I don’t think this has had a major impact on most hedge funds so far. “

In the US stock options market, traders appeared more determined to take profits from existing hedges than to buy protection against a sell-off, even as the VIX (.VIX) hovered around its all-time high in four months .L1N2QM1L2

Andrew Left, founder of Citron Research, who published a report in June 2012 that Evergrande was insolvent and defrauded investors, also didn’t expect widespread pain.

“I don’t think this will be the straw that breaks the camel’s back for the global economy,” he said.

Indeed, some investors have said Monday’s price cuts should have been expected given the S&P 500 rally over the summer and concerns ranging from the debt ceiling debate in Washington to the prospect of an increase in capital gains taxes.

“In September, we thought that with valuations and optimism so high that investor sentiment seemed a bit vulnerable to a dramatic but short-lived change,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.

Reporting by David Randall in New York Additional reporting by Saqib Iqbal Ahmed and Gertrude Chavez-Dreyfuss in New York and Svea Herbst Bayliss in Boston Editing by Megan Davies, Ira Iosebashvili and Matthew Lewis

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